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Daily analysis 01.02.2018

1 Feb 2018 12:45|Marcin Lipka

The appreciation trend on the dollar ended shortly after the Federal Reserve statement. Europe responded to the yields on the US Treasury bonds growth. Average British PMI readings did not affect the pound. PMI from the Polish industry was slightly weaker than the consensus, but was still strong. The EUR/PLN pair close to the 4.15 boundary.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • 2:00 p.m.: Minutes from January's Polish MPC meeting,
  • 2:30 p.m.: Weekly data on initial jobless claims from the US (estimate: 235k),
  • 4:00 p.m.: January's ISM index from the US industry (estimate: 58.6 pts).

Hawkish Fed statement with no power over dollar's quotations

Yesterday's Fed statement, although limited due to lack of press conference and macroeconomic projections, was relatively hawkish. The Federal Reserve stated that while the unemployment rate reminded low, employment grew and household spending and investments were solid. A passage on inflation dips has disappeared, however, information about the growth of future inflation market's measures has appeared. The Committee has also suggested a further gradual adjustment of monetary policy, which can clearly be understood as a desire for further rate hikes.

The market has likely understood it in this way as well. Shortly after the statement's publication, yields on Treasury bonds increased (10-years- to 2.75%). The market is also already valuing almost 80 basis points of monetary tightening by the end of the year, which is more than FOMC forecasts from December. This strengthened the dollar slightly yesterday evening, but this movement reversed just after the European session begun.

The movement's reversal occurred because the profitability in the eurozone (e.g. Germany) is also increasing. Perhaps the market expects synchronised economic growth to translate into more symmetrical inflationary processes on both sides of the Atlantic and also put pressure on the ECB to raise interest rates faster than suggested in the statement. Therefore, this is one of the key factors that keep the EUR/USD pair close to three-year highs.

Moreover, another issue became important. The positive condition of emerging market currencies (including the zloty) are caused by very good sentiment among global investors. However, rising future interest rates may threaten the equity market mainly due to the relatively high valuation of these assets (especially in the USA). Increased financing costs for businesses can worsen the profit profile of many companies. In turn, rising credit costs can also hamper consumption growth. Such situations may arise when the return on Treasury bonds increases and the sentiment on shares deteriorates simultaneously. This would be a very negative message for emerging markets, due to possible mean capital outflow from these markets. Although this is not a core scenario currently, it seems that the risk of its implementation may increase.

Increased price pressure on British Isles

PMI data that was published today regarding UK industry for January was below the line. The reading of 55.3 points is relatively high, but taking into account the eurozone's data (approx. 60 points), the results seem to be average. In addition, the data has been the weakest in 7 months. The new orders component is also the lowest that it has been since June. In the case of production, this has been the slowest expansion pace for six months.

Rob Dobson, (IHS Markit's Director, prepared the PMI report together with CIPS) in a summary of the data, drew attention to the sudden increase in inflationary pressure. Cost inflation increased to 11-month highs, sharply reversing the downward trend. In general, the deterioration of industrial activity combined with higher costs is not a favourable combination. However, this may be neutral in the short term for the pound as it suggests that interest rates should be raised earlier than expected.

Calm zloty but changes may occur

The Polish currency reacted relatively calmly to yesterday's Fed statement. Only the USD/PLN pair increased slightly, but the whole movement was at about 0.01 PLN, and when the dollar lost a significant part of the global USD/PLN growth, it also returned below the 3.35 boundary.

Apart from the Fed, the PMI readings from the Polish industry are important. The readings were slightly below the market consensus (54.6 vs. 55.2 points), but are more positive than in the UK's result. According to the IHS Markit, there has been the strongest increase in new orders since January 2015. Despite the decline in production, it is still growing at a steady pace. In general, the data can be perceived as neutral.

However, the zloty may be under pressure by worsening global sentiment. The sentiment cool-down in the global equities market combined with increases in yields on the US Treasury bond (details in the previous paragraphs) could trigger capital outflows from emerging markets and therefore harm the zloty. Although this is not a core scenario for the time being, it seems likely to be true.


1 Feb 2018 12:45|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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